analysis
By Paul KibuukaWhen the Tanzanian Parliament passed the Bill for the Financial Leasing Act of 2007, a lot was expected to be achieved - capital investment and access to finance - in case it could become law on being assented to by President Jakaya Kikwete.
The law governing financial leases could help meet the needs and demands of local and international investors. On 11 April 2008, the Parliament endorsed the Bill. The same year Tanzania enacted the finance leasing law to help with leasing and hire purchase transactions.
The International Finance Corporation (IFC) Advisory Service was implementing the project for financial leasing development in Tanzania with support from the State Secretariat for Economic Affairs (SECO) - the Swiss federal government's centre of expertise for all core issues relating to economic policy.
But what is financial leasing? Simply defined, financial leasing is a way of financing the purchase of equipment. In a financial lease, the lease term is set close to the expected economic life of the equipment. The lease payments are set so that their total over the lease term will cover the cost of the asset plus interest and profit.
At the end of the lease term, the lessee usually has the right to purchase the equipment. The residual value of the equipment at the end of the lease term is of little or no significance to the lessor. In Tanzania, as elsewhere in Africa, local and international investors are taking a keen interest in financing, mostly in debt instruments.
Financial leasing is a safer way of debt financing, as it shifts borrower-based risk to the value of an asset which is far easier to measure, monitor and control. Although reliable statistics that can show whether financial leasing has picked up the way it was expected are hard to come by, financial leasing nowadays forms an integral part of Tanzania's economic activity.
There is a wide array of entities resorting to lease financing: infrastructural utilities, oil and gas companies, power plants, industrial users, electricity companies, and transporters. Small and Medium Enterprises (SMEs) and consumers are also using the opportunity to access finance for acquisition of business equipment through periodical rental payment.
This therefore is helping solve a long cry by SMEs that they are locked out of having access to finance offered by financial institutions, as established by some studies in Tanzania. Practitioners in the industry comment that the country has seen businesses grow almost from the scratch through lease finance and some financial institutions and banks have taken part in providing the service.
For example Stanbic Bank in Tanzania, a member of the Standard Bank Group of South Africa, has for the last six or so years offered funding against a variety of assets, including commercial vehicles and equipment.
As well, the creation of TIB Corporate Finance, a new corporate financing entity by TIB Development Bank, one of the country's premier development finance institutions, should lead to a more organized focus on financial leasing.
According to Moyo Violet Ndonde, who was the IFC Project Team Leader by the time Tanzania was working to develop financial leasing, the growth prospects of leasing in the country are encouraging because of the high potential in market.
Three years ago today, Alios Finance, a leasing equipment rental, investment lending and consumer finance group, implemented a project that would be well positioned to respond to the demand for asset finance in Tanzania and East Africa under the IFC.
The project was to support the expansion of Alios Finance by providing a financing package of up to US$10.2 million in combined senior debt and equity to its "greenfield" leasing subsidiaries in Tanzania and Kenya to meet the demand for term financing for equipment and other assets.
The effort of the IFC and the Government of Tanzania has been markedly fruitful. There has been a number of leasing companies grabbing the opportunity and helping SMEs expand their operations in the country. It goes without saying that any one that enters the equipment leasing segment with adequate capital and technology and more significantly, at volumes which justify very sound credit management, would find a huge untapped potential.
Women entrepreneurs are among the beneficiaries who for long were categorized as main victims of the tough conditions on loans offered by banks and financial institutions.
"Our aim has been to empower women economically through finance leases thereby going around the problem of lack of collaterals," according to Dr Victoria Kisyombe who formed a company to support women who cannot afford bank loans.
Dr Kisyombe has been at the forefront of efforts to liberate women by helping them get the confidence and support they need to grow their businesses through financial leasing. Her organisation was used as the case study for the need to have financial lease products in Tanzania.
She formed an indigenous enterprise called SERO Lease and Finance Limited (SELFINA) to achieve her mission of helping women overcome the barriers that social norms and customary laws often impose on women entrepreneurs in East Africa. The business she launched has helped to provide women entrepreneurs, specifically microentrepreneurs in rural Tanzania, with the financial support they needed to create and sustain their own businesses.
"Because of our mission, inevitably at the end of a lease term we pass the ownership to the women. They can then leverage the assets with further borrowing," Dr Kisyombe adds. Some experts say that in business environments where the financial leasing system does not exist, doing business requires huge cash to operate.
According to Bernard Kihiyo of the Tanzania Consumer Advocacy Society, a lot of capital usually goes into equipment, installation, freight, consulting and software, and that only fewer funds go to items like inventory, safety improvement, and advertising and consumer education.
In this case, Mr Kihiyo sees that financial leasing becomes important for it gives the lessee control over any asset for a large proportion of the asset's useful economic life, providing the lessee with the benefitsand risks-of ownership. As some case studies illustrate, the value and role of financial leasing in an economy is huge.
Equity for Africa (EFA), a non-profit NGO, which also operates financial leasing shows that some SMEs have been able to expand their businesses and create jobs in areas of its operation. Citing other case studies from entrepreneurs like E liphas Kitomari, Kihiyo says Kitomari struggled to keep poultry for five years, producing 900 chicks a month using traditional incubator.
The entrepreneur preferred this method for he could not afford the automated electronic incubator and hatcher. Mr Kitomari in 2007 received US$5,400 from EFA to fund an automated electronic incubator and hatchery, increasing production capacity to 5,000 chicks per month. He paid the amount within three years and now he is a potential poultry farmer.
Operation of EFA has been vital for economic growth given that as of September last year a total of TShs804.8 million was injected in 76 investments. Each project had an average investment size of TShs10.6 million. Through the investment, about 202 jobs were created, 84 jobs maintained and the average investment per job was TShs2.8 million.
The sector that mainly benefited was agribusiness by 32 per cent followed by the service sector at 24 per cent, manufacturing by 28 per cent and primary agriculture by 16 per cent. Though financial leasing is very important, Mr Kihiyo warns that it is one of the most difficult forms of businesses especially in a turbulent economy like Tanzania.
This is because unstable currency and an inflation rate that every so often reaches double digits may probably discourage majority of investors in the leasing business.
Another issue of concern to the practitioners is the cumbersome nature of the judicial process, which affords crooked lessees the free day to frustrate lessors.
In addition, Tanzanian lessors often have to contend with huge administrative and legal costs to pursue defaulters particularly in the event of repossession. However, bearing in mind the promising future of Tanzania's oil and gas industry, the country continues to be an attraction to the global majors for financial leases.
Moreover, with massive government plans to develop infrastructure and a generally stable economy, Tanzania presents a unique opportunity for finance and leasing business.
Needless to say, long-term investors and financiers, especially in the energy, utilities and infrastructural sectors including transportation, will find a good market, secure clientele with government backing, and a pretty reasonable rate of return from lease payments.
The author is an Advocate and the Managing Partner of Kibuuka Law Chambers.